Social networking

Microsoft’s acquisition of LinkedIn for more than $26 billion raised a lot of eyebrows for good reason. True, the acquired company is valuable and generating revenue but like most of the social networking space, it is far from healthy and one wonders if Microsoft could have gotten a better deal.

According to a colleague at the Enterprise Irregulars, Ross Mayfield, Ellen Levy reported that the deal can boast a number of superlatives if you look at it right, among them,

The largest sale of a consumer Internet company in history;

The largest sale of an enterprise software/cloud company in history;

The third largest sale of a technology company since 2001; and

The largest acquisition ever made by Microsoft.

With those attributes you might expect that LinkedIn is in a really hot sector and everybody wants to get it at any price. It looks like a regular feeding frenzy. Well, hold on big guy, here are some other numbers to consider.

Facebook announced revenue in Q1 2016 at $5.2 billion and profit of $1.51 billion tripling its year over year comparison according to a BBC News article that you can read here. Good for them.

But now consider Twitter, which according to CNN Money has lost a cool $2 billion since 2011. I wonder if this can be construed as an illegal campaign contribution to The Donald. At any rate, Twitter has never turned a profit. Yikes!

Then there’s LinkedIn. According to a Reuters article from February 4 of this year that you can find here, “LinkedIn Corp forecast first-quarter revenue and profit below Wall Street estimates as growth slows in its ads business and its hiring services face pressure outside North America, dragging its shares down 28 percent after the bell.”

The article goes on to say that, “Online ad revenue growth slowed to 20 percent in the fourth quarter from 56 percent a year earlier as automated ads offered by Alphabet Inc’s Google make its traditional ad displays less attractive to advertisers.” Finally there was this, “Its revenue forecast of about $820 million also missed analysts’ expectations of $866.9 million by a wide margin.”

Suddenly it looks like social media has become a winner take all market accentuated by Metcalf’s Law which states that the value of a network is directly proportional to the number of nodes i.e. users in this case. Why use anything but the biggest network unless it’s specialized as LinkedIn is because of its sales and HR focus.

This is happening despite the high acceptance of social media in everyday life, just ask The Donald. Social has rapidly become the thing everybody loves to use and no one wants to pay for. The advertising business model that most companies rely on doesn’t help.

Advertising has its limitations. There is a huge pool of money available for online ads but huge is not infinite. Just as there is lots of music available, people only want to pay for hits. If you combine Metcalf’s Law, which tends to limit the number of viable networks in this space and add in the reality of the fickle consumer you have an instant recipe for a declining market, which is what we see.

Don’t worry, social media is too important to go away. It’s so important that it has commoditized its market into a virtual singularity. That’s the bad news too. The social market looks like it can support 2 styles; say Facebook’s and Twitter’s. There might be additional vendors in the space for a long time especially if larger companies buy them and they function as loss leaders. That’s ultimately the vision I see for any social company not named Twitter or Facebook.

Microsoft announced the intent to buy LinkedIn for $196 per share today or more than $26 billion. It’s a huge deal and a great payday for the social networking company specializing in making it easier for business people to connect. But why do this deal and why now? This calls for a lot of speculation but perhaps we can make some sense of it.

Like other major software companies including Oracle and Salesforce, Microsoft sees itself as an essential platform for enterprises at all levels. The more functionality it can provide to its users, the easier it will be to keep them at home rather than roaming the Internet looking for something new. In addition, the availability of a familiar face such as LinkedIn has great appeal for many customers.

But also, we may be witnessing the consolidation of the social networking space. Brands like LinkedIn, Twitter, and Facebook, and others such as Plaxo and MySpace, all got started around the same time—about ten years ago. Since then each has found a niche and many rely on an advertising model for revenue and growth.

Those models are limited by network constraints, however. Each might be flexible and have great people working there but as Metcalf’s Law stipulates, the value of a network is directly proportional to the number of nodes on it. In our case nodes can be thought of as people and while we might all have Twitter and Facebook accounts, the number that also have a third network is smaller for the simple reason we can only track so much.

So the advertising potential of networks is similarly limited. There is a large revenue pie for ads on social networks but it isn’t infinite and as is often the case, the early participants like Google continue to capture the lion’s share of revenues. In such a situation, if LinkedIn can be relieved from the need to generate so much ad revenue growth by simply becoming a valuable addition to the overall Microsoft value proposition, so much the better. The situation is similar with other vendors that offer social and collaboration functions as part of their value propositions, like Salesforce and Oracle.

All this is to say that the age of social media is likely entering a mature phase. We can see which ones will be able to have a stand-alone future and which ones won’t. This doesn’t mean social networks and social media are becoming passé—just the opposite. They’ve become so valuable that they are becoming commodities and it’s hard for commodities to reap soaring profit growth (that’s why they’re commodities).

So, good for Microsoft and LinkedIn, I think they are better together and their association seems to signal an inflection point in social networking. The strike price of $196 per share is significantly below last year’s peak of nearly $260 but also significantly above Friday’s close of $131.08, just about right in the middle. Is everybody happy?

ZDNet headlined that the US Senate passed the legislation to require Internet commerce companies to collect state sales taxes and I think it’s about time. The line against the bill has more to do with political doctrine than with sound financial management.

Who likes taxes? I don’t. But it doesn’t make a lot of sense to let some retailers completely off the hook. Historically, the feds have given special incentives and deals to groups to incentivize their behavior. When we built railroads the government paid for the work and gave the railroads free land along the lines to foster construction and settlement. Subsidies were taken away like training wheels on a big boy bike once new industries got going and that’s where this legislation is coming from.

If we look objectively at the situation, the online retailers have had a sweet deal. No sales taxes to worry over, no bricks and mortar, fewer employees, centralized distribution and the customer paid the shipping. Online retailers saved a bundle over their traditional competitors. And while it’s true that they had systems to build, data centers and logistics hubs to spin up, they had access to venture capital that mom and pop never even dream about when they’re running their store.

So now the playing field will be a bit more level. People will still shop online for all of its convenience and lower costs and mom and pop will still have to deal with all of the vagaries of brick and mortar retail. They’ll all have to collect and remit taxes to appropriate states and I can’t see what the big deal is.

I have been a little slow in commenting on many of the important happenings as we start the year. A month ago, there wasn’t a lot of good meaty news and now there is too much. And then there is the matter of doing real work of the kind that pays the rent.

This item caught my eye the other day in the New York Times. Seems there have been some legal challenges to using social media in the workplace or even on one’s own time to discuss the workplace. The National Labor Relations Board or NLRB got involved and enforced a New Deal era law governing free speech for employees. Nice going as far as I can see though there are some appeals pending.

The crux of the issue was whether employees kibitzing on social media about work and working conditions, even if the talk is less than complementary to the boss and the business, have a right to do so. To me this looked like an effort to both limit people’s exposure to social and to buff a company’s reputation by hindering the free flow of information.

A wise man, I think it was Marshall Lager once told me, information needs to be free. He was, of course, right. Maybe in some Soviet era organization of Fidel’s failed fiefdom that logic holds sway but not here in the good old U.S of A.

Aside from my jingoistic tirade though, social is not just a technology or method it is a movement. The free flow of information through social has toppled tyrants much bigger than a shabby boss. We’re still trying to figure out where the bumpers are on the social track and that’s a certainty but it’s nice to know that the NLRB could dust off a law from the last time we were as communally oriented and pop it into the later stages of the information age.

This story caught my eye in the New York Times and I can’t get it out of my mind. The title says it all — Number of Protestant Americans Is in Steep Decline, Study Finds. The Pew Forum on Religion and Public Life did the research and discovered that white Protestants from liberal Episcopalians to right leaning “born agains” were leaving their faiths and replacing them with…nothing. Young people are not engaging in religion as they once did.

This loss is measurable and steep. Over the last five years the percentage of Americans expressing no religious preference rose from fifteen percent to nearly twenty, according to the piece, a gain of five percentage points on the overall demographic. While you can point to forty years ago and see seven percent of American adults expressing no preference for religion, the drop over the last five years appears especially precipitous.

The report speculates that the reason both Protestants and Catholics became disenchanted with organized religion came when those religions took a right turn and became more active in conservative causes like opposition to homosexuality, gay marriage and abortion.

To back up this contention, the article quotes Phil Zuckerman, a professor of sociology and secular studies at Pitzer College in Southern California. “The significant majority of the religiously unaffiliated tend to be left-leaning, tend to support the Democratic Party, support gay marriage and environmental causes,” he said.

Ok, I don’t want to get into politics and I dislike talking about religion much more than this so here’s my point. Five years ago (2007) social media was embryonic. LinkedIn launched in May of 2003, Facebook in February 2004 and Twitter in March 2006. So, does the evolution of social media have anything to do with the decline in religiosity? Consider that the biggest group of non-believers is “younger millennials,” people between 18 and 22 — the same people who led the social medial wave. Fully one-third of this group checks off the “none of the above” box when it comes to religion.

So, did right leaning religion leave an opening in the hearts and minds of young people? Did disaffected young people gravitate to social media to access the feeling of community once the exclusive province of religion? I am not asking this to hurt anyone’s feelings. Maybe I am making too much of this but that’s how my curious mind works.

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